Estate Planning for Expat Retirees
Much like Medicare, estate planning is also affected by whether a retiree will be permanently or temporarily leaving the United States. While the specifics will be different for every case, retiring abroad generally entails leaving younger generations back in the United States (or even elsewhere around the globe). While the intentions of an American retiree’s estate plan are not necessarily going to change should she move abroad, by taking up a long-term residence in a new retirement “home,” an estate plan is now likely to be subject to a whole new set of laws in a new country. These foreign laws were not considered or contemplated when wills were drafted, properties were titled, trusts were created, etc.
One of the more dangerous routes that an expat family may take is to rely solely upon the estate planning that was done before leaving the United States. It is generally advisable to review an existing estate plan (and the broader financial plan) when major events (divorce, remarriage, etc.) have resulted in changed circumstances. The importance of doing so is particularly acute when retiring overseas or moving from one foreign country to another. U.S. expats need to be aware that standard U.S. estate planning techniques will likely fail to protect wealth in cross-border situations and may even produce unintended, counterproductive results. These are issues that extend beyond the scope of this guide (see our more comprehensive Guide to Estate Planning), but certain issues can be discussed to illustrate the nuances involved in cross-border estate planning.
Utilizing Wills in International Estate Planning
A will should be reviewed by local counsel in the new country of residence/domicile as well as U.S. counsel. Some overseas estate planners suggest multiple “situs” wills, with each will governing the distribution of property in the country for which the will is designed.
There seems to be some risk in a strategy of multiple wills, as the traditional rule holds that the legal execution of a will extinguishes the validity of any prior will. For Americans retiring in the Eurozone, Americans may be able to take advantage of a recent development (EU Directive 850/2012) that champions the one-will policy and further allows cross-border families to select which laws will govern their probate/succession: either the EU country of residence OR the country of citizenship.
Retirees should exercise caution when moving overseas with trust structures. If a current estate plan includes trusts, it is particularly dangerous to move overseas with the existing domestic estate plan. This is because the trust may not operate as intended when the tax and probate laws of a new country become applicable.
While trusts are recognized under U.S. law, in civil law/forced heirship regimes, a fundamental problem exists when examining distributions to heirs through such a trust. Contrary to the forced heirship concept, the beneficiary who inherits from a trust is receiving the property from a legal person, rather than a natural person lineal relative (parent, grandparent, etc.) in percentages that may differ from forced heirship requirements. As a result of this legal conflict, asset distribution schemes through trusts may either fail to be recognized by the overseas courts, or distributions may be taxed more punitively. There have been recent reforms in several civil law jurisdictions designed to better accommodate foreigners’ trusts, but, uncertainties and complications remain.
The dangers are not limited to the expat who relocates to a civil law jurisdiction. If a U.S. citizen retiree arrives in the U.K. (a common law jurisdiction) with an existing living trust (a very common U.S. estate planning tool), she will often find out (after the fact) that this trust triggered income tax in the UK that would not have applied, had the assets been held directly by the expat retiree, and had she claimed remittance-based taxation. Later, should the expat decide to leave the U.K. or terminate the trust, even unrealized gains may be taxed upon the expat’s departure or trust termination. In yet another common law country, Canada, a special capital gains tax may be periodically assessed on trusts holding Canadian real property. Conversely, expats retiring abroad should be even more cautious about setting up trusts abroad for the benefit of themselves or their American heirs.
The U.S. has extremely punitive reporting and taxation rules applied to beneficiaries who receive distributions from foreign trusts. Moreover, the IRS can have a very broad definition of what constitutes a “trust”. It is entirely possible that a foreign business arrangement, partnership, joint venture, etc. may fall into the IRS’s liberal interpretation of what constitutes a “trust”. As with all matters germane to cross-border taxation and estate planning, such arrangements should be reviewed by competent U.S. and local tax and legal professionals at the earliest stage possible.
Gifting Strategies While Abroad
Lifetime gifting strategies are a common method for reducing a taxable estate in the United States. Gifting can be especially effective for American retirees abroad with family still in the United States. Section 529 college savings plans (see Creative Planning International’s research article on 529 Plans for expats) have grown more and more popular over recent years, as parents and grandparents begin to realize the tremendous long-term advantages to saving larger amounts for college in earlier years for children and grandchildren. 529 accounts allow substantial deposits via accelerated gifting (as much as $160,000 in a one-time gift from joint filers covering a five-year period) and provide Roth IRA-style tax-free growth of the investment account, provided that the 529 plan assets are ultimately withdrawn for qualified educational expenses. While U.S. expats are free to open and fund 529 college savings accounts, they must be aware of the local country rules in their country of residence regarding the gains that will eventually accumulate within these accounts. They must also determine how the local gift tax rules may apply to their gifting strategies. Alternative college savings or generational gifting strategies (including having U.S.-based relatives open the 529 account) may prove far more productive for certain expats than others.
Estate Planning for Families that Include a non-U.S.-Citizen Spouse
Many Americans retiring abroad are returning to the homeland of their non-American spouse. Unfortunately, the tax complications and challenges facing American expats amplify when applied to the circumstances of marrying a non-U.S. citizen. Moreover, substantial legal expertise in both the country of residence and within the U.S. may be needed. The couple will need to make certain decisions in terms of how they share property (or keep assets separated) and how their assets will transfer to the surviving spouse (or to others) upon death. It is important that these mixed-nationality couples understand the unique U.S. tax rules that will apply to their situation and the implications of those rules on these important decisions. Understanding how these rules apply will ultimately help these couples own and transfer (gift, bequest, etc.) their wealth most tax-efficiently.
For a more thorough discussion of key planning issues for mixed nationality (U.S./non U.S.) families, see our article or our Guide to International Estate Planning.